Facebook-Goldman: Where Is the S.E.C.?

Happy New Year everybody. I’m working on a post about the economic prospects for 2011, but, first-up, a quick memo to Mary Schapiro, the head of the Securities and Exchange Commission: Mary, once again the boys and girls at Goldman Sachs appear to be making a mockery of you and your colleagues.

How else to describe the news from Dealbook that Goldman is setting up a special purpose vehicle to allow rich people to invest in Facebook? Under the securities laws, once a company has more than five hundred investors it is obliged to convert into a public company by issuing stock to investors at large. It is well known that Mark Zuckerberg, the founder of Facebook, doesn’t want the hassle of running a public company, not yet, at least, and Goldman’s latest wheeze seems to be designed to let him have his cake and eat it. If the deal goes ahead, Facebook will get up to two billion dollars of new capital to invest in its business but will, for the moment, remain a private company—of sorts.

As part of the deal, Goldman will reportedly invest $450 million in Facebook and Digital Sky Technologies, a Russian investment firm which already has a substantial stake in the social network platform, will invest another $50 million, but that is only stage one. In stage two, according to Dealbook, “Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said.” The story goes on: “While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.”

Say one thing for Goldman: the firm has chutzpah. Just last July, there it was acting all contrite and paying $550 million to settle an S.E.C. suit that charged it with misleading investors in marketing some complex securities tied to sub-prime mortgages. Goldman failed to disclose that one of its biggest clients, John Paulson, the hedge fund manager, had helped to select the sub-prime loans underpinning the securities, and that he stood to gain handsomely if the securities fell in value, which they quickly did. Six months later and Goldman again appears to be trying to twist the securities laws for the benefit of itself and one of its clients—Facebook.

Maybe, there’s more to the story than this, but based on today’s reports it looks like Goldman is, once again, running rings around the regulators.